Hi, Stan.
There is a fundamental difference between MODELS (MDLs) and level geometry. You really don't want to use MDLs for level geometry and here is a good reason why:
MDLs do not have accurate collision detection, but instead rely on a collision BOX.
As a result, if your camera/player is within the MDL, then you are within the collision box and, thus, there is no collision. If you insist on using your MDL as a level, then you will have to se the MDL to PASSABLE (so your player can walk right through it) and then approximate the level with level geometry that is invisible (textures set to NONE). You only need to place the invisible level geometry where collision detection is necessary (such as on the floor and walls, etc.).
There is another option. Somewhere out there there is a stand alone app that will convert 3DS files to MAP files (which WED supports, BTW). I think the app is called 3DS2MAP. If you have an older version of MAX (version 3 or down) there is the QMAPEX plugin that will export out your level as a MAP file. Also, there is a more "modern" MAP exporter for 3D Studio MAX 4 or 5.